Central Banks Intervene to Weaken Yen After Post-Quake Surge

Japan ’s risk of becoming the first Group of Seven member to return to a recession after the global financial crisis eased as the G-7 intervened to halt the yen’s
appreciation. Photographer: Tomohiro Ohsumi/Bloomberg

March 18 (Bloomberg) -- Central banks intervened in
currency markets to weaken the yen after it soared to the
strongest against the dollar since World War II, threatening
Japan’s recovery from its worst earthquake on record.

“In response to recent movements in the exchange rate of
the yen associated with the tragic events in Japan, and at the
request of the Japanese authorities, the authorities of the
U.S., the U.K., Canada, and the European Central Bank will join
with Japan, on March 18, 2011, in concerted intervention in
exchange markets,” the Group of Seven said today in a
statement.

The yen depreciated 2.9 percent to 81.32 per dollar as of
9:25 a.m. in Tokyo from 78.89 yesterday in New York, when it
reached a record 76.25 as increased risk of radiation leaks from
a crippled nuclear power station boosted speculation Japanese
investors will bring home overseas assets.

The combined sales are an attempt to limit the damage a
strong Japanese currency will have on the nation’s economy in
the aftermath of the magnitude 9 earthquake that struck on March
11. Japan unilaterally sold more than 2 trillion yen ($26
billion) in foreign-exchange markets in September to stem gains,
its first intervention since 2004.

The intervention started at 9 a.m. Tokyo time and followed
a Group of Seven industrialized nations conference call to
discuss the impact of the March 11 earthquake in Japan, Finance
Minister Yoshihiko Noda told reporters after the call. Each
country will intervene when their markets open, Noda said.

“Foreign-exchange markets are convinced that when the main
central banks act together, that has to be taken very
seriously,” said Paul Robson, a senior foreign-exchange
strategist at Royal Bank of Scotland Group Plc in London. “The
last thing Japan needs is a sharply stronger exchange rate. They
don’t want the global financial system to be weakened by sharp
moves in the yen exchange rate.”

Japanese Investors

The yen typically climbs during crises because Japan’s
current-account surplus means it doesn’t need foreign funding
and because of the likelihood Japanese investors will repatriate
assets. Japan holds $885.9 billion of Treasuries, the highest
tally after China, according to the U.S. Treasury.

The currency reached its previous postwar high of 79.75 per
dollar three months after Japan’s magnitude 6.9 Kobe earthquake
in January 1995, which killed about 6,400 people, on speculation
that bilateral talks to open up Japan’s auto market to U.S.
exports would fail. Japan sold a total of 1.8 trillion yen in
February and March that year as the yen rose 10 percent.

There have been more than 530 aftershocks since the March
11 temblor near the city of Sendai that left at least 5,457
people dead, with more than 9,500 missing and hundreds of
thousands stranded and without power. Prime Minister Naoto Kan
called for calm as he dispatched 100,000 troops to the
northeastern region.

Tsunami, Meltdown

The tsunami and concern of a meltdown at Tokyo Electric
Power Co.’s Fukushima Dai-Ichi nuclear plant has forced more
than 450,000 people from their homes.

Japan’s success in reversing the yen’s gains on its own
last year proved transitory. While it slumped 3.3 percent to
85.75 against the dollar on Sept. 15, the day of the
intervention, the currency had strengthened to 80.22 by Nov. 1
as the Fed announced a second round of so-called quantitative
easing to purchase $600 billion of Treasuries. The U.S. is
Japan’s second-biggest trading partner.

“Japan had come in for some heat from overseas authorities
for intervening before, but it’s becoming more acceptable to
take action now, given that the move is designed to limit the
damage a strong yen will have on the economy in the wake of the
earthquake,” Takahide Kiuchi, chief economist at Nomura
Securities Co. in Tokyo, said before the announcement.

Japan’s success in reversing the yen’s gains on its own
last year proved transitory. While it slumped 3.3 percent to
85.75 against the dollar on Sept. 15, the day of the
intervention, the currency had strengthened to 80.22 by Nov. 1,
before the Fed announced a second round of so-called
quantitative easing to purchase $600 billion of Treasuries.